Are money market rates at absolute zero?

Have bank interest rates reached absolute zero -- that is, have they sunk as far as they can go?

According to FDIC figures at the beginning of October, money market rates are now at 0.26 percent, rates on savings accounts are at 0.18 percent and 1-month CD rates are at 0.16 percent. Those are national averages, and the best CD rates, money market rates, and savings account rates are all significantly higher. However, the FDIC averages are a good indicator of the overall trend for bank rates.

That trend suggests that rates have just about reached absolute zero. Despite a general worsening of economic conditions in recent months, all of the above rates are just a hair below where they were a couple months ago and it is beginning to appear they can't fall any farther.

The importance of determining the bottom for money market rates, etc.

Knowing when rates have hit bottom is important for financial decision making. It helps with:

• Planning ahead. If you are saving towards a goal, be it a vacation next year or your retirement in thirty years, you need to have an idea of how much help you can get from interest. The answer for short-term goals is not much. You can probably assume a little better for long-term goals, but your interest rate assumptions should probably be compromised of rates somewhere between historical norms and current levels.
• Deciding on CD terms. The best CD rates may be on longer-term CDs, but should you really lock in when rates are this low? Of course, since longer-term CD rates are higher, they do still have room to fall further, and indeed, that's where the larger moves in rates have been in recent months.

Return from absolute zero -- what will get rates moving upward again?

What will move rates upward from absolute zero? Three possibilities:

1. Improvement in the economy.
2. Recognition by the Fed that its low interest rate policy isn't working, and may actually be counter-productive.
3. A return of inflation.

Of these, the second may be the least likely, and the third would be the most damaging, so keep your hopes on the first possibility.